[ by Melanie Gretchen ]

Dark pools have emerged as a source of criticism and regulatory scrutiny.  However, what they are – electronic Alternative Trading Systems where the the size and price of the orders are not revealed to other participants – might not face such wrath if they were better known, according to D. Keith Ross (right) CEO, of software development firm PDQ Enterprises.  "With so much uncertainty, I think it's time to set the record straight and deal with the significant amount of misunderstanding about how they operate. So in David Letterman fashion I have created a list.

Top Ten things People Don't Understand about Dark Pools

1) It is not a "Black Market," it's just not displayed. Many comments in the media imply that Dark Pools are the "wild wild west" and anything goes; every man and woman for themselves, customers are exploited, brokers make tons of money. This is not the case.

2) Dark Pools have been around since trading began; it's not new, it was just called "upstairs trading" in the past.

3) The Securities and Exchange Commission has recognized the importance for institutions to be able to work orders without displaying the whole order "to maintain long term confidence" in the markets. Cited multiple times in regulatory comments, particularly those around Reg. NMS - the new rules governing the National Market System.

4) Dark Pools are highly regulated. All Dark Pools are broker-dealers registered with the SEC and The Financial Industry Regulatory Authority (FINRA) and subject to regular audits and examinations, similar to an exchange.

5) Users "opt-in" to placing their orders in a Dark Pool. The users are intelligent traders who understand the advantages of not displaying their orders at an exchange.

6) Dark Pool trades are bound by the "NBBO" or National Best Bid and Offer. Prices cannot be chosen arbitrarily, many times the price is actually the midpoint of the NBBO but a stock cannot trade outside the NBBO without an inter-market sweep satisfying orders on other markets.

7) More volume is trading in the Dark Pools because it works for institutions. The percentage of non-exchange trades has grown to roughly 33 percent of all trades up from 8-10 percent a decade ago; this is because the users of Dark Pools have had a better experience in the dark than at an exchange.

8) Different Dark Pools have different features to appeal to different segments of the market. Some only allow certain types of traders, say "Buy Side to Buy Side" so naturals can trade with each other. Other Dark Pools allow you to rank your contra trading partners and opt out of those you don't want to trade with. This allows the traders to create a customized experience different than the exchange one size fits all approach.

9) Orders in dark pools are like ice bergs. For a trade to take place, a resting bid, or buyer, has to be present when a seller initiates a sale. Many times both sides are not present at the same moment as orders are cancelled and replaced, these orders are referred to as "ships passing in the night".

10) The biggest reason people are afraid of "Dark Pools" is the name, like a kid being stuck in a closet by a mean sibling, the image is frightening. Maybe they should be called "Block Trading Venue for Institutional Traders Who Know What They are Doing". BTVITWKWTD -Doesn't exactly roll off the tongue does it?"

[CNBC, 2/2/13]